Cryptocurrency has become a very popular way to invest in securities. Additionally, cryptocurrency can also be used as currency for a number of online purchases. However, new investors in cryptocurrency may not completely understand the tax burdens associated with trading cryptocurrencies. As a result, some investors may be surprised to receive an unexpected tax bill due to their cryptocurrency investment. If you need assistance with reporting income from cryptocurrency trading, you should consult with an experienced Califorcpnia accountant for cryptocurrency tax consulting. At the Cook CPA Group, we understand that it can be difficult to stay abreast of constant changes to the tax code, and we are here to help you remain compliant with cryptocurrency tax reporting requirements. Our team of accountants will work diligently to help you meet your tax planning goals. The Cook CPA Group is here to discuss how cryptocurrency tax reporting requirements are handled in California and by the federal government.

What are Cryptocurrencies?

Cryptocurrencies are purely virtual or digital forms of currency that are highly difficult to counterfeit due to the use of cryptography. Cryptography is the process of securing information by using a complex series of codes so that only intended parties can view the information. There are various types of cryptocurrencies. However, many of them are kept as decentralized networks.

One of the primary benefits of keeping cryptocurrencies as decentralized networks are that they are not subject to interference by government agencies. However, there are many other benefits of using cryptocurrency:

  • Ease of transferring funds between two parties without the assistance of a bank or financial institution
  • Minimal processing fees for transferring cryptocurrencies
  • Evasion of expensive transfer fees utilized by banks

This is not an exhaustive list. Note, however, that the somewhat anonymous aspect of cryptocurrency trading makes it easy for the currency to be used for illegal activities like money laundering. This has likely contributed to the increased regulations on cryptocurrency trading.

The first type of cryptocurrency to become wildly popular as Bitcoin. While Bitcoin is still the most popular type of cryptocurrency, there are other competitors that have risen to challenge Bitcoin, such as Litecoin and Ethereum. If you invested in cryptocurrency and need financial services to determine how it affects your taxes, you should speak with an experienced accountant today.

Tax Reporting Requirements for Cryptocurrencies in California

If you have engaged in the selling, buying, saving, mining, or the paying of debts using cryptocurrencies, you should be concerned about your tax reporting requirements. Your tax reporting requirements can vary depending on your activity with the use of cryptocurrencies. While it can be difficult to understand taxes and investor tax savings for cryptocurrencies, our team of tax accountants is here to help you through the process.

If you are a resident of California, you may have various obligations to report your cryptocurrency transactions to the Internal Revenue Service (IRS). For example, if you have capital gains from the trading of cryptocurrency, you will have to report these gains to the IRS.

Capital gains tax is calculated by examining a taxpayer’s profits earned by the selling of an asset. This law applies to cryptocurrencies because cryptocurrencies are taxed as property holdings instead of cash. As a result, if you earned profits from selling your holdings in Bitcoin or another cryptocurrency, you will have to report these earnings to the IRS. Specifically, a taxpayer must report these earnings on a Form 1040 for income tax return and a Schedule D for capital gains and losses.

Foreign Reporting Requirements for Cryptocurrencies

The United States also taxes foreign income earned by American citizens, green card holders, and even resident aliens. As a result, taxpayers were once subject to tax reporting laws if their cryptocurrency was being stored in a foreign country. Specifically, if a taxpayer had cryptocurrency that was held in another country, they would have needed to file a Foreign Bank Account Report (FBAR), also referred to as Financial Crimes Enforcement Network (FinCEN) Form 114 if their foreign cryptocurrency exceeded $10,000 during the tax year.

Recent regulations by the FinCEN has stated that U.S. persons no longer need to file an FBAR for cryptocurrencies that are held in foreign countries. However, many taxpayers are still struggling to understand whether the IRS still requires the reporting of foreign cryptocurrency. Our firm can help you learn which tax reporting requirements apply to your unique situation.

Like-Kind Exchange Reporting for Cryptocurrency

Prior to 2018, taxpayers could utilize like-kind exchanges for cryptocurrencies. A like-kind exchange is when a taxpayer defers their capital gains tax for real property to property transactions using Section 1031 IRS Form 8824. However, the Tax Cuts and Jobs Act of 2017 no longer allows taxpayers to use like-kind exchanges for cryptocurrencies.

Our firm understands that reporting requirements for cryptocurrencies are extremely complex and troublesome for many taxpayers, and we are here to help you stay compliant with ever-changing tax laws.

Consult with Our Experienced California CPAs to Discuss Your Cryptocurrency Tax Reporting Requirements

If you require assistance to remain compliant with cryptocurrency tax reporting requirements, you should consult with an experienced Roseville accountant for tax structuring of investments. The accounting team at the Cook CPA Group possesses a wealth of experience handling cryptocurrency tax reporting, and we would be happy to provide you with our services. To schedule a free consultation to discuss your cryptocurrency investments, contact the Cook CPA Group at (916) 432-2218. You can also reach us online.